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Strategies & Market Trends : Options
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To: edamo who wrote (5682)3/28/2000 4:22:00 PM
From: KFE  Read Replies (4) of 8096
 
I haven't posted here in some time (too active for me to monitor closely) but I would like to dispel some myths about options that I have seen posted.

90% of options expire worthless- not true

Professional option traders only sell options- not true- actually most market makers/traders will be gamma positive the majority of times which implies a long position. Most make money by trading implied volatility when they cannot trade the bid/asked spread. This means that they are buying underpriced options and selling overpriced ones.

Covered calls vs. naked puts- both are the same position. They will have the same dollar amount risk/reward but the naked put will give you a higher rate of return and can be boosted if written against T-Bills in the account. The only reason I can see why someone would write covered calls is that they can't do naked puts because of an IRA account, no naked approval, or are required to hold stock in the account such as institutions, or have existing long term stock that cannot be sold. If starting an account from scratch and you want to maximize your return selling naked puts will yield a superior return to covered calls. This is pure mathematics and not my opinion.

Taxman's strategy- I have traded options since they began trading and I can't recall any professional traders who just bought options but that doesn't mean that it is not possible to make money doing it. You just have to be very good with your timing since you lose if the underlying goes slightly in your desired direction or against you. Similar to going to the track... you have to beat the vig... some can do it but not very many. I believe that Taxman only uses a small percentage of his portfolio to buy options. A wise strategy.

Nice to see the knowledge level of options increasing on the thread but there are many ways to trade options and all of them do not fit everyone's style of trading.

Regards,

Ken


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